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Craig Parmelee, a managing director with S&P's corporate and government ratings division, testified that S&P first rated MF Global in May 2007 and maintained a "triple B-plus" rating of the company until February 2008. At that time, the rating agency downgraded MF Global to a "triple B" due to losses from unauthorized trading and "high financial leverage." When its new CEO, Jon S. Corzine, announced in 2010 that MF Global would be transitioning from a traditional commodities broker to a full service investment bank, S&P once again downgraded the company to a "triple B-minus," "just one notch above speculative or non-investment grade status." Parmelee noted that this rating was lower than that of S&P's chief competitors. Parmelee further testified that S&P "noted that the strategy would likely result in the company taking on more proprietary trading positions, which in our view would be riskier than the company's traditional broker business. We further stated this company's risk management controls continue to be a work in progress." — Discovery of European Sovereign Debt Positions In May 2011, MF Global, for the first time, disclosed that it had off-balance-sheet exposure to approximately $6.3 billion of European sovereign debt through repurchase to maturity (RTM) transactions. According to Parmelee, the "disclosure caused no discernible disruption in the capital markets" because the portfolio was comprised of highly rated sovereign bonds that would only result in losses if the sovereigns defaulted. As such, S&P maintained its rating of MF Global through the summer of 2011. — MF Global Placed on Credit Watch for Potential Downgrade In October 2011, however, the situation at MF Global began to deteriorate. According to Parmelee, the credit crisis in Europe, coupled with MF Global's "disappointing" earnings report caused the firm's investors and their counterparties to "become quickly and increasingly concerned about the firm." Amid the concern, S&P attempted to obtain additional information about MF Global's RTM portfolio. In response to its inquiries, MF Global executives told S&P that the company was "'in its strongest position ever as a public entity." The next day, however, MF Global reported a quarterly loss of $191 million. Despite Corzine's continued statements touting the financial health of the firm, MF Global's stock price fell approximately 50 percent that day. Parmelee testified that the day after the earnings announcement, S&P "placed MF Global's rating on credit watch with negative implications, under review for a potential downgrade . . . reflect[ing] S&P's view that continued volatility in the capital markets and low interest rates could further harm MF Global's ability to generate capital." S&P also noted the company's RTM exposure and increased risk profile at that time. — MF Global Receives "D" Credit Rating On October 31, 2011, MF Global filed for bankruptcy. S&P immediately downgraded the company to a "D" rating. According to Parmelee, S&P did not believe that MF Global collapsed because of its RTM portfolio. Instead, he testified that "MF Global's demise was driven primarily by a rapid downward spiraling of confidence among market participants and counterparties who questioned the firm's transparency and its ability to attract and maintain investors and generate revenue."

Moody's Coverage: MF Global a Risky Credit

Richard Cantor, chief credit officer of Moody's, testified that "for several years, Moody's viewed MF Global as one of the riskiest credits among all U.S. banks and securities firms." Underlying this view was the notion that MF Global particularly was reliant on customer and counterparty confidence and had "speculative characteristics." Cantor summarized Moody's early ratings of MF Global "as not particularly strong." In 2008, Moody's rated MF Global at "BAA-1" with a negative outlook. It downgraded it to "BAA-2," and by the end of 2010, this rating carried a negative outlook. In February 2011, Moody's reaffirmed MF Global's negative outlook and identified three areas of concern: (1) earnings; (2) leverage; and (3) risk. In August 2011, without any improvement in these three areas, Moody's indicated that it likely would downgrade MF Global again. — October 2011 Meeting Precipitated Series of Downgrades On October 21, 2011, Moody's analysts met with Corzine and other MF Global executives in advance of its quarterly earnings announcement. According to Cantor, Corzine made clear that the RTM transactions were "purely proprietary trading positions" and that the company would report a "significant" loss. Acting on its August 2011 prediction, on October 22, 2011, Moody's downgraded MF Global's rating to "BAA-3" with review for further possible downgrade. Cantor echoed Parmelee's description of MF Global's final days and testified that "an accelerating flight of customers and counterparties rapidly took hold." As the crisis of confidence and liquidity gathered pace over the subsequent 48 hours, Moody's downgraded its rating to "BA-2" and kept the credit on review for a further possible downgrade." Moody's once again downgraded MF Global to "CAA-1" when it filed for bankruptcy, and withdrew its credit rating altogether on November 15, 2011.

Distinguishing itself from Moody's and S&P, James Gellert, CEO of Rapid Ratings, suggested that credit rating agencies were to blame for MF Global's collapse because its "bankruptcy follows trends with other notable financial failures from the last 12 years in one way: agencies that were paid to provide professional opinions on credit risk failed to give sufficient warning of the firm's risk." Gellert noted that while S&P and Moody's carried investment grade ratings for MF Global from 2007 until the brink of its demise, Rapid Ratings "provided two years of warnings that MF Global was a high-risk sub-investment grade entity." Gellert further testified that the methodology used by his firm differed from that of traditional credit ratings agencies. For example, Rapid Ratings is a user-paid, not issuer-paid, firm. In addition, it uses financial statements and a proprietary software-based system to formulate ratings. This means that Rapid Ratings does not utilize market input or qualitative analysts, and it does not have contact with management bankers, investors, or advisers in the ratings process. Gellert explained that Rapid Ratings gave MF Global a "23" rating indicating a high-risk category and below investment grade. He further explained that Rapid Ratings' "23" rating was the "rough equivalent" of a "CCC-minus" rating, or "8 to 10 notches below where they sat for the big three agencies," that include S&P and Moody's. According to Gellert, the "23" rating was the product of a "simple story" of MF Global's decline in revenue performance, profitability, and debt service management over several years. For example, MF Global recorded losses for 10 of the last 16 quarters, and the last four quarterly losses increased by 68 percent. Challenging testimony earlier in the panel, Gellert testified that Moody's and S&P "barely moved" their respective ratings during this time period. He concluded by suggesting that "it is time to require more timely ratings, more accurate ratings, and more competition."

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